This article was posted on July 18, 2025, at 8:55 a.m. on the ChosunBiz MoneyMove site.
MERITZ Securities has been selected as the preferred negotiator for the 5 trillion won liquefied natural gas (LNG) asset securitization of SK Innovation and has begun the process of a billion scale sell-down (resale after acquisition).
MERITZ Securities will first sell down the volume of price-revenue swaps (PRS) investing in SK On. The MERITZ Financial Group will receive an interest rate of 7.6% as a junior investor and will re-sell the remaining to other institutions at an interest rate of 4.3%.
◇ MERITZ must achieve an internal revenue rate of 'over 7%'
According to the investment banking (IB) industry on the 18th, MERITZ Securities will sell down 1.4 trillion won of the 2 trillion won PRS volume for acquiring shares of SK On. MERITZ will directly acquire 600 billion won as junior debt and re-sell the remaining as senior debt.
Earlier, MERITZ Securities proposed to invest 3 trillion won of the 5 trillion won allocated for SK Innovation into a convertible preferred stock (CPS) format for power plants, while the remaining 2 trillion won would be directly invested in SK On as PRS, thus surpassing competitors to become the preferred negotiator.
While the scale is larger for CPS, it was decided to sell down starting with PRS, as investing in PRS is a precondition for CPS. In other words, the structure indicates that MERITZ can only secure the investment of 3 trillion won through CPS once the direct investment of 2 trillion won in SK On with PRS is finalized. It is understood that MERITZ has not yet submitted a letter of credit (LOC) for the CPS investment. The situation necessitates that they must sell down starting with PRS while completing due diligence on the power plants for CPS.
MERITZ Securities will acquire the entire 2 trillion won worth of PRS at an annual interest rate of 5.3%. If 1.4 trillion won of this is re-sold in the market at an interest rate of 4.3%, the effective yield for the 600 billion won that MERITZ will acquire as junior debt will rise to 7.6%. The profit that MERITZ retains is the difference between the total return (5.3%) and the interest paid to external investors (4.3%).
This meets the structure that fulfills MERITZ Securities' internal revenue rate criterion of 'over 7%'. To achieve this revenue rate, MERITZ must limit the interest rate for the 1.4 trillion won senior debt to below 4.5% during the sell-down.
◇ 'More attractive than SK Innovation bonds' vs 'It will be difficult to sell down under current conditions'
Opinions vary regarding how attractive PRS investments will be from the perspective of institutions. Some believe that the difference in yield between senior and junior debts is too great, while others see it as attractive compared to corporate bonds.
This PRS is designed based on shares of SK On, with SK Innovation providing guarantees. It is known that SK will transfer its shares of SK On to MERITZ Securities under a condition to buy them back later. In return, SK will pay an interest rate of 5.3%. In effect, institutions are investing in the credit of SK Innovation. This creates an effect similar to indirectly holding corporate bonds of SK Innovation.
SK Innovation has a corporate bond credit rating of 'AA', indicating almost no risk of default. If a company is likely to default, it would be important whether it is senior or junior debt, but in the case of SK Innovation, the interest rate level is deemed to be more significant than the order of debt recovery.
In this situation, some industry insiders analyze that there is little reason for institutions to take on additional exposure to SK Innovation at a 4.3% yield. If MERITZ Securities does not increase the senior interest rates while sacrificing some of the junior debt rates, it will not be easy to expect syndication.
Maximizing returns using a tranche structure (dividing loans and bonds by risk and repayment order) applies to both PRS and CPS deals.
MERITZ Securities plans to underwrite 3 trillion won of CPS issued by SK Innovation's power subsidiaries, receiving an interest rate of 6.7% to 6.8%. Of this, 1 trillion won is expected to be acquired as junior debt, while there is a high likelihood of selling down 2 trillion won as senior debt. The senior interest rate is likely to be 5.8%. Considering this, the interest rate for the 1 trillion won junior debt that MERITZ will acquire is estimated to be around 8.5%.
However, there is a counterargument that investing in PRS and CPS may still be sufficiently attractive. A financial industry insider said, 'The yield on corporate bond investments in SK Innovation is around 3%', adding, 'Compared to corporate bonds, the 130 basis points attraction provides sufficient incentive.'